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Year of the Bank: Citi, JPMorgan to Thrive in 2018

For example, while their previous estimates called for double-digit EPS growth on average prior to tax reform, their new estimates call for 25% growth. Moreover, he thinks that the sector will be able to carry over its momentum into 2019 as well.

Given all this, Goldberg and Morton are still bullish on large-cap banks in general, with some 20% upside on average, and a dividend yield above 2%. All this comes with a benign economic backdrop of growing GDP and improved unemployment. Earnings will also get a boost, they write, by improved loan growth, expanding net interest margins, higher capital markets revenues, and active capital deployment amid a regulatory environment that's looking more favorable.

Of course, nothing's perfect, and there are a few concerns to note:

Our concerns center around several themes including: the economic outlook (banks are a reflection of the economy and we are in the later stages), interest rates (the yield curve is the flattest it's been in over a decade, while deposit betas are on the rise and the Fed is unwinding QE), tax reform (while generally a positive there are many moving pieces), and technology (moving very rapidly and competition remains intense, increasing the importance of economies of scale). In addition, the pace and scale of regulatory rollback could be uneven (and MiFID II is a new uncertainty), while the mid-term elections will be of interest.

Goldberg and Morton expect the money center banks to continue to outperform: Even if they aren't the first beneficiaries from regulatory rollbacks, they have the most gain, they argue. They write that Citigroup (C) and JPMorgan (JPM) stand out, while Goldman Sachs (GS) "could play some catch-up." (Goldman was the 8th worst performer in the Dow last year.) They also expect some super regional banks, like M&T Bank (MTB), U.S. Bancorp (USB) and Wells Fargo (WFC) to "regain some of their lost luster."

The Financial Select Sector SPDR ETF (XLF) is down 0.2% this afternoon, as is the SPDR S&P Bank ETF